Condominium Deconversion - A Savvy Investment

​Economic changes, such as interest rates, government regulations, and the ratio of buyers and sellers, can greatly impact the real estate market. One area that is often overlooked is the market’s impact on condominiums.

Traditionally, condominiums are complexes in which every unit has a different owner. This differs from multi-family or residential complexes, where all units are condensed under a single owner or entity.

Condominium owners pool their resources with other owners under an association. The association allocates these funds to renovation projects that affect the entire complex, such as communal spaces and outdoor areas. The current market conditions and changes to inspection laws have made the condominium model more costly.

If there is a dip in funds due to low unit occupancy, or they are inadequate to fund needed repairs, condominium associations can face economic distress. In these cases, associations and owners can choose to sell the entire complex to a real estate investor, a process known as deconversion.

This can be an amazing opportunity for investors, as they can bring new rentals to the market without incurring the costs of construction or extensive renovation. Even after paying for the needed repairs, investors can still reap a high rate of return by renting out units at the market rate.

Many condominiums are also non-owner occupied, which means tenants are already in place. This can reduce the risk of multi-unit real estate, such as losses due to low vacancies. Deconversion can also be ideal for sellers and association members, as these deals sell at above-market rates. It also prevents owners from going underwater due to a sudden increase in repair costs.

Real estate investors interested in a condominium deconversion should look for buildings in popular rental markets. If the demand for rentals is high, there is a greater chance that the units will reach maximum occupancy once on the market.

Investors should also weigh any upfront expenses, including repairs, legal fees, utilities, and possible property management costs. If the deal seems promising, the investor can propose directly to the condominium’s homeowners association.

Undergoing a deconversion deal is not complex, but it is legally regulated. Associations in buildings that are at risk of needing significant upgrades to meet new government regulations may be particularly motivated to sell.

However, condominium associations cannot broker a deal without owner approval. In most jurisdictions, some owners must agree to the deal. This could range from two-thirds to a unanimous vote.

The voting power of owners may be proportional. For example, owners of larger units own a higher proportion of the building and therefore have a larger percentage of the vote.

Once the required percentage of owners agree to the deal, the rest of the owners may be compelled to sell their units to satisfy the terms. However, to avoid prolonging the process, investors usually offer a lucrative rate much higher than what owners would get in a standalone sale.

Putting together a deconversion deal can take time, as investors are dealing with possibly dozens of sellers. However, investment opportunities are expected to increase as condominiums age and require extensive repairs.

Robert Palley

Shop